Our view from December 2020 was that sooner or later, nuclear would be included in the ESG basket (see “Is This The Beginning Of The Next ESG Craze“). There have been multiple signals from the US Energy Department to develop a domestic uranium strategy. 

We first pointed this out in March in a note titled “Uranium Stocks Soar After US Signals Aid For Nuclear Power.” Then in June, in a note titled “Uranium Stocks Soar On Report US Seeking Billions To End Reliance On Russian Enriched Uranium.”

On Wednesday, Jennifer Granholm, the US energy secretary, gave even more clues about a domestic uranium strategy that would eventually eliminate the US reliance on Russia and its allies Kazakhstan and Uzbekistan for about 50% of its uranium needs, according to Reuters. 

“The United States wants to be able to source its own fuel from ourselves and that’s why we are developing a uranium strategy,” Granholm told reporters at the International Atomic Energy Agency conference in Washington. 

“We’ll be working on … enhancing that and making sure that we can fuel our own reactors as well as the partners to those who also have those ambitions,” she added.

In August, President Biden signed the Inflation Reduction Act, which helps pave the way for nuclear energy to reduce US emissions before the decade’s end. 

Momentum is certainly building for expanding zero-emission nuclear power production and sourcing uranium domestically, outlined in the IRA via increased investments and tax incentives. 

IRA contained $700 million to produce a high assay low enriched uranium (HALEU) supply for advanced nuclear power plants. Then in September, the White House requested Congress to allocate $1.5 billion in a temporary government funding bill to boost domestic HALEU supply. 

Granholm said the White House will “seek an additional large amount by the year-end for a more fulsome strategy.”

The move by the Energy Department is to remove Russia’s critical leverage to throttle US nuclear power. There’s a big push to increase US mining and processing of uranium to ensure US energy security. 

The broader Uranium space has been on an upswing for the last two years. 

Like the US, other countries around the world, including Germany and Japan, are developing plans or implementing strategies to revamp their nuclear power plants after years of neglect. It seems like climate alarmist Greta Thunberg’s war against nuclear is finally being ignored.  

Authored by John Haughey via The Epoch Times (emphasis ours),

Nationwide early voting and vote-by-mail turnout trends for the 2022 midterm election reflect a pattern similar to that of the pandemic-skewered 2020 election.

As a result, it may take several days after polls close on Nov. 8 for results to be confirmed in several key battleground states, including Pennsylvania, Wisconsin, and Michigan.

In-person early voting periods and vote-by-mail have grown increasingly popular over the last two decades. They became mainstream during the 2020 election when more than 101 million Americans cast early in-person votes or vote-by-mail ballots.

The 2022 early vote and vote-by-mail turnout is expected to easily eclipse the record for midterm elections set in 2018, when more than 5 million voters cast early in-person ballots and 30.4 million voted by mail. The totals this year may come close to matching the number of ballots cast before Election Day in 2020.

According to the University of Florida’s United States Elections Project, as of Oct. 23, more than 7.46 million Americans have already cast their midterm ballots.

Turnout

Of those 7.46 million ballots, nearly 1.65 million were cast in-person in the 27 states where early voting is under way. Early voting periods range from four to 45 days before Election Day.

By week’s end, another 18 states will open polls for in-person early voting, beginning with seven states on Oct. 24—including Florida, Texas, Colorado—and ending with New York and New Jersey on Oct. 29.

More than 5.8 million mail ballots of 41.52 million requested nationwide have been returned to local election offices as of Oct. 23, according to U.S. Elections Project. All 50 states offer voting by mail, or absentee ballot options. Nine states, including California, Colorado, Nevada, and New Jersey, send mail ballots to all registered voters.

Not all states break down early votes and mailed votes by political affiliation when posting turnout figures. In Kansas, North Carolina, and New Mexico,  138,406 Democrats (40.5 percent) and 112,047 (32.8 percent) Republicans voted early in-person.

Georgia, which opened its early voting period on Oct. 17, reported more than 740,600 early ballots cast as of Oct. 23. Early voting ends Nov. 5 in the state.

The Georgia tally includes a record midterm first-day early voting turnout of 131,000, twice as high as the 71,000 first-day early voters in 2018, and nearly matching the 136,739 who showed up on the first day early-voting polls opened in 2020.

“We’re extremely pleased that so many Georgians are able to cast their votes, in record numbers and without any reports of substantial delays,” Georgia Secretary of State Brad Raffensperger said in a statement. “This is a testament to the hard work of Georgia’s election workers, the professionals who keep our elections convenient and secure.”

Georgia, which does not provide party affiliations with early voting and vote-by-mail turnout tallies, reported Oct,. 23 that more than 31 percent of requested mail-in ballots had been returned.

Vote-by-Mail Turnout

Of 17 states that provide party affiliations for more than 3.74 million vote-by-mail tallies to the U.S. Elections Project, 51.3 percent came from registered Democrats, and 30 percent were mailed in by registered Republicans.

Florida, where early in-person voting begins Oct. 24 and ends Nov. 5, has registered the largest vote-by-mail turnout thus far with more than 1.16 million of 4.23 million requested mail ballots already filed with local elections offices as of Oct. 23. Registered Democrats cast 42.2 percent of the mail-ballot votes, and Republicans cast 38.2 percent. Nearly 20 percent of the mail ballots were cast by non-affiliated voters.

Florida Gov. Ron DeSantis, a Republican, in early October signed an executive order that allows four Southwest Florida counties that remain devastated in Hurricane Ian’s wake more flexibility in expanding in-person voting and voting by mail. Among those emergency measures is allowing three more days of early in-person voting.

During an Oct. 15 press conference, the Republican governor encouraged residents in Southwest Florida to vote by mail.

“What I would say is whatever you like is fine. We’ve got good returns on absentee, and I have confidence in early voting, in person (voting) and, of course, Election Day” voting, DeSantis said.

The only state that comes close to the 1.16 million who’ve returned vote-by-mail ballots in Florida is California, where all 21.87 million registered voters get ballots in the mail. As of Oct. 23, nearly 1.08 million Californians had returned mail ballots, according to the U.S. Elections Project.

Of those returned California VBM ballots, nearly half were mailed in by Democrats while 28 percent came from registered Republican voters.

Read more here…

The US rental market is beginning to cool down, but not in all areas. Boston surpassed San Francisco as the second most expensive rental market, with New York in the number one spot, according to Bloomberg. 

Rental listing company Zumper published new data that showed median one-bedroom rent in Boston increased by 5.9% in October from the prior month to $3,060. San Francisco dropped to the third spot with a 2.6% decline to $3,020. New York City is still the most expensive city for median one-bedroom rent, even though prices fell 2.3% to $3,860. 

“These eye-popping prices shine a light on Boston’s ongoing housing crisis,” Zumper said in the report, adding, “New inventory coming online is skewed towards the luxury market, pushing median asking prices even higher.”

Even though Boston rents are increasing, residential real estate brokerage Redfin’s latest report showed median rents across the country recorded their first notable decline in almost two years last month. 

“The rental market is coming back down to earth because high rents and economic uncertainty have put an end to the pandemic moving frenzy of 2020 and 2021, when remote work fueled an enormous surge in housing demand that would’ve otherwise been spread out over the coming years,” said Redfin Deputy Chief Economist Taylor Marr.

Marr continued: “Rising supply is also causing rent growth to slow. Scores of apartments that have been under construction are now coming on the market, and more homeowners are choosing to become landlords instead of selling in order to hold on to their record-low mortgage rates.”

And he expects “rent growth to slow further into 2023 as Americans continue to hunker down and more new rentals hit the market.”

So the takeaway is that some rental markets are cooling while others continue to boil. Avoid the ones that continue to see rising prices, and if you can, wait until next year to lock in a rental contract when prices are expected to be much lower. It doesn’t make sense to sign a two-year contract at the peak. 

Authored by Satyajit Das via NakedCapitalism.com,

Ordinary lives are lived out amidst global economic, social and political forces that they have no control over. Today, multiple far-reaching pressures are reshaping that setting.

This three-part piece examines the re-arrangement. This part examines current great geopolitical divisions. The second and third part, will look at key vulnerabilities and possible trajectories respectively.

There are decades where nothing happens; and there are weeks where decades happen“. The pithy phrase (the attribution to Lenin is contested) encapsulates periods when established orders are challenged and sometimes overturned, often violently. The question is whether this is one of those times.

Today, there is a sharp division between the ‘West’ – the US and its Anglosphere acolytes (Canada, Australia, New Zealand) supported unenthusiastically by Europe and Japan-  and the rest of the world. While a simplification, the categorisation is helpful in understanding key contemporary events and potential changes to the current global order.

Points of Difference

Positions on the Ukraine conflict highlight the schism. Support for Ukraine is primarily Western, representing around half of global GDP but less than 20 percent of world population.

Couched in platitudes about shared values and unity, Europe and Japan’s tepid support of the Anglosphere reflects competing priorities. Like the Anglosphere, they benefit from American military protection which lowers defence spending  allowing resources to be used more productively. Despite a 2006 commitment to defence spending of 2 percent of GDP, NATO members average only 1.6 percent, with Germany, Italy, the Netherlands and Spain spending 1.3-1.5 percent. At the same time, geographic proximity to Russia and China as well as greater economic connections complicate allegiances.

Relationships between Germany, Japan and the West bear deep scars. The former has fought two world wars against its Western allies. The US and Britain reduced much of these countries to rubble. America deployed nuclear weapons against Japan with the ancillary objective of intimidating potential rivals. The rehabilitation of Germany and Japan served US post-World War 2 interests, creating bulwarks against the threat of communism. It reversed the original plan of reducing both to agrarian pasts unable to compete with America globally.

While urging a rapid end to hostilities, the majority of nations have been reluctant to condemn Russia’s actions, often professing neutrality. With an eye to its own regional territorial claims, China acknowledges Russian grievances. China and India along with most nations are sensitive about foreign intervention in their internal affairs. The West has highlighted recent public expressions of disquiet by Chinese and Indian leaders. However, there was no direct reference to or support of Ukraine. The comments mainly focused on the conflict’s impact on food, fuel and fertiliser supplies. Most nations prefer the benefits of maintaining relationships with all.

The conflict has unified the West against Russia and given NATO renewed focus. But Ukraine has also created a common cause for those with long standing grievances against the West. Countries such as Iran, a US branded member of the “axis of evil”, have sought to exploit the widening gulf between global factions. They have become suppliers of military equipment to Russia. This opportunistic co-operation exacerbates the global split.

The non-Western position reflects history. Associations are complicated by racially charged, exploitative colonial pasts, and experience of Western hypocrisy. There are legitimate questions about the support for Ukraine, especially the provision of generous financial and humanitarian aid, compared to that offered to forgotten victims of conflicts and disasters in the Middle East, Asia and Africa. The favoured treatment of white, Christian refugees has not gone unnoticed.

A Sea of Troubles

The avoidable Ukraine conflict, with its unnecessary destruction and human suffering, is best seen as a catalyst.

Unwillingness to recognise core interests of parties, increasingly entrenched positions, and lack of interest in negotiations means a spiral into a wider confrontation is not impossible.  With escalation difficult to calibrate, the evolution from a proxy into a real war between the US and Russia, which might draw in China, all nuclear-armed, remains possible.

The West’s expressed desire for engineering regime change within Russia is dangerous. Any new regime may not be more amenable to Western pressure. History, most recently the Arab Spring and Colour Revolutions, shows that a dangerous political void is more likely than liberalisation.

Whatever the length, dimensions and outcome, Ukraine has exposed already present major differences in the world. In particular, the West’s response -trade restrictions, sanctions and asset seizures- will outlive the military actions and prove more damaging.

The weaponization of trade and finance, modern gunboat diplomacy, has a long lineage. Sanctions and blockades were used in World War 1 and influenced Japan’s entry into World War 2. Western embargoes against communist bloc countries were common during the Cold War. Since 1979, the US has sought to isolate the Islamic Republic of Iran established by a popular revolution which overthrew the Shah, who had been installed by an American coup d’état. Measures against Russia commenced in 2014. The US has imposed progressively more stringent restrictions on China covering exports and sales of critical technologies since 2018.

In the short term, the measures have affected Covid19 disrupted supply chains, aggravating shortages and price inflation, especially in food, energy and raw materials. In the longer-term, the interaction with other stresses may prove significant.

The effects of climate change driven extreme weather – droughts, floods, storms, wildfires-  on food production and transportation links is accelerating. A triple dip La Niña alone threatens large scale disturbance with a potential global cost of $1 trillion (around 1 percent of global GDP). Resource scarcity – water, food, energy, raw materials- is simultaneously rising due to natural limits.

The decisions by major producers to increasingly stockpile or limit foreign sales to ensure domestic supply and control local costs are adding to disruptions to food production,. As of mid-2022, 34 countries had imposed restrictive export measures on food and fertilizers contributing to surging prices of key staples.

Energy shortages are not purely the result of sanctions on Russian oil and gas exports. Underinvestment, due to ESG compliant investors limiting funding for traditional energy sources, has affected supply. The necessary but over-hyped transition to renewables is a contributor. Proponents have overestimated its speed and underestimated the challenges of substituting existing generation capacity, reconfiguring electricity systems and converting industry and heavy transportation to non-fossil fuels. Shortages of critical metals and minerals, many non-recyclable, will retard conversion to new energy sources.

Given the world’s high energy needs, availability and cost will remain a major issue. Progress on controlling climate change, already inadequate, will reverse, perhaps fatally. Concern about emissions has been replaced by focus on energy security. A reversion to fossil fuels to lower prices and the cost of living is already apparent.

Slowing globalisation, which previously drove global growth, is another factor. Despite its benefits, greater economic integration has drawbacks. It reduces national sovereignty. Sharing of benefits and costs are frequently unequal. The 2011 Thai floods, the Tohoku earthquake, tsunami and resultant Fukashima nuclear plant disaster, and multiple episodes of extreme weather have illustrated the fragility of just-in-time production and tightly coupled global supply chains. The Ukraine conflict is the latest chapter in this history.

The 2008 Global Financial Crisis and Great Recession played its part. It exposed a key globalisation funding mechanic – large financial imbalances (China-US and intra-Europe). Germany and China needed the US, the world’s consumer of last resort, the Southern Eurozone and the Anglosphere to absorb their surplus production. The resulting large current account surpluses financed deficits in the consuming countries. 2008 underscored the risk of this strategy for savers – primarily Chinese, East Asian, German, Japanese and oil exporters. China’s Premier Wen Jiabao spoke for all when expressing concern about the safety and security of their capital.

The Western response to the financial crisis added to the disquiet and fed global division. The beggar-thy-neighbour monetary, fiscal and currency policies of advanced economies were destabilising for many countries.

China, Russia and India, to different degrees, saw the events of 2008 as signalling Western weakness and validation of their state controlled political and economic systems. It encouraged a distrust of the West and strengthened the belief that evolution into more open economies and societies was risky. Resistance to greater globalisation was the result.

While these pressures are likely to persist, complete deglobalisation and a retreat to autarky is unlikely in the short run. It is simply too difficult to replace intricate connections created over several decades overnight. More importantly, the effect on availability and cost of products would be great, reducing living standards. Instead, a dollop of decoupling is the most likely course. Increased re-, near- or friend-shoring of goods and services production is possible. Digital or e-globalisation may continue. But the retreat into distinct groupings or trading blocs – a us-and-them world- will be difficult to arrest.

Changes in the electoral dynamic are reinforcing the shift. Financial crises, economic stagnation, inflation, shortages, war and pestilence (the Covid19 pandemic) generate anxiety and fear. Politicians in all countries have exploited the instability.

Without tractable solutions, mainstream parties have largely lost their dominance. The appeal of strong, populist leaders has increased. Increasingly, the strategy is to put a reasonable face and emollient gloss over often unpalatable views in order to get elected.

Like traditional parties, the populists, both of the left and right, do not have answers to the major problems of the day. Instead they parade nationalist credentials and strong leadership. They target globalisation, elites (Davos Man), foreigners, immigration and overseas interference in domestic matters.

For democracies, the crisis is deepening. For existing authoritarian nations, it has strengthened latent instincts for centralised control, one party systems and repression.

The combination of these stresses have set up feedback loops which are now reshaping existing economic and power relationships.

Winners and Losers

All nations are affected by these changes, but not equally.

Functioning as an isolated entity or bloc requires a sizeable population, large internal market, self-sufficiency in key resources (food; water; energy; raw materials), necessary technologies and skills, and ability to ensure your security. The alternative is assured access to these elements from within your trading bloc or allies.

The sanctions imposed following the Ukraine conflict illustrate the dynamics. The limited effect, to date, of restrictions reflects the fact that Russia possesses many of the identified characteristics to operate as a near autarky. The absence of universal compliance also reduces the effectiveness of measures like sanctions.

Non-West countries, such as China and India, have an incentive to defy sanctions. They benefit financially from the ability to purchase oil and gas at significant discounts, sometime re-selling it raw or as refined products. Attempts at more complete enforcement, such as oil and gas price caps, may not be successful. It would require exclusion of all violators from global payments and insurance or imposition of secondary sanctions. But preventing access to insurance for shippers carrying Russian oil will disadvantage poorer countries but not large nations, like China and India, able to self-insure.

Jenga games of balancing cutting off Russian energy sales and ensuring adequate supplies to control prices was always going to be beyond the capabilities of economically-challenged bureaucrats and politicians.

China illustrates a different approach. It lacks self-sufficiency in food and raw materials, such as iron ore and energy.  Strategic overseas investments, the Brick and Roads Initiative and leasing farmland target these deficiencies. Interestingly, Russia can supply a significant part of the Middle Kingdom’s food, energy and mineral needs although this would require reconfiguration of infrastructure. This process is already observable in global energy markets with Russian output being redirected East while Gulf and Australian supplies going to the West.

Having been relatively isolated until the 1990s, countries like Russia, China and India are not fully integrated into the global market system. Legacy structures are capable of reverting to a more closed economy.

In recent years, these countries have increasingly redirected policies and investment towards their home markets, abandoning reflexive globalism. The objective is the greatest possible independence and control over strategic sectors and essential products. For example, China has developed and sought to force businesses and population to adopt its Beidou satellite navigation system instead of the US GPS satellite system and Europe’s Galileo. In parallel, it seeks to export technology to build networks of client economies and governments frequently incorporating them into aid packages, soft loans and commercial transactions.

The West is more reliant on global commerce, although individual positions differ.

The US is substantially self-sufficient in food and energy. However, it has outsourced large components of its manufacturing and would have to re-skill its workforce to re-shore activities. It also requires export markets for its products – around 40 percent of S&P 500 companies’ revenue originates outside the US.

Canada, the UK, Australia and New Zealand enjoy varying degrees of food and resource self-sufficiency. Canada, Australia and New Zealand are exporters of food or raw materials. The UK is a significant exporter of services. All depend on imports of manufactured goods, a significant proportion of which is from China.

Europe and Japan are oriented to manufacturing exports, with significant reliance like the Anglosphere on Chinese demand. Both are reliant on imported raw materials, especially energy. Japan has a growing reliance on imported foodstuffs, with its food self-sufficiency rate having fallen to around 38 percent of calories consumed from 73 percent in 1965 because of rising demand for foodstuffs it cannot supply, like meat.

The West’s major disadvantage is its high cost structures, which have been offset in recent decades by imported cheap labour and raw materials. Europe, especially Germany, has tied its economic fortunes to the availability of low-cost Russian gas. If forward prices prove correct, then Europe’s gas and electricity cost would reach nearly €2 trillion ($2 trillion or around 15 percent of GDP). The high operating leverage in the case of Germany equates to around $2 trillion of value added production from $20 billion of imported Russian gas.

Attitudinal differences are important. Asiatic patience and memory breed resilience. A fatalistic acceptance of life’s constraints and caution about progress makes the non-West more resistant to setbacks and reversals.

In his 1933 work In Praise of Shadows, Japanese writer Junichiro Tanazaki captured this divergence:  “We… tend to seek our satisfactions in whatever surroundings we happen to find ourselves, to content ourselves with things as they are; and so darkness causes us no discontent, we resign ourselves to it as inevitable. If light is scarce then light is scarce; we will immerse ourselves in the darkness and there discover its own particular beauty. But the progressive Westerner is determined always to better his lot. From candle to oil lamp, oil lamp to gaslight, gaslight to electric light – his quest for a brighter light never ceases, he spares no pains to eradicate even the minutest shadow.”

Changes in the existing global economic structure threaten Western living standards. The disruption of global trade and mobility during the Covid19 Pandemic and resulting shortages provided a window into these susceptibilities.

Mutual Misunderstandings

The fracture reflects fundamental differences in belief and values. Western thinkers, as varied as Montesquieu, Adam Smith, Voltaire, Spinoza and John Stuart Mill, were wedded to the idea that trading between nations could overcome tribalism, national identity and ideology reducing the risk of conflict. There was also an implicit confidence about the dominance of the West.

Late twentieth century globalisation, with its espousal of free trade and capital movement, was indivisible from this political end and propagation of certain values. Integrating previous antagonists like China, Russia, India and others into global trading arrangements would bring about political change helping strengthen the West’s position. The end of history would produce the suzerainty of a carefully crafted internationalist economic system which favoured the West.  Under chancellors from Willy Brandt to Angela Merkel, Germany exemplified this policy of “change through trade” which created the now troublesome energy dependence on Russia.

But Chinese, Russian and Indian engagement with this Western agenda was always superficial. China was effectively bankrupt when Deng Xiaoping assumed power in the late 1970s. India and Russia faced penury in the early 1990s. Embrace of globalisation was driven by necessity not conversion to Western values or economic tenets.

Liberalisation, allowing greater private ownership and a modicum of free enterprise, was designed to boost living standards to placate a restive population. There was never any great desire for fully opening up and wholesale reform of the economic or political system. At best, it was marginal changes to the basic planned economy model. The central idea of an insulated system capable of existing in isolation from the West was never abandoned.

President Xi has repeatedly emphasised the Chinese Communist Party’s traditional leadership in government, military, economic, civilian and academic matters. He has preached self-reliance and rejected competitive democracy, the rule of law and the separation of powers as foreign ideas. Far from being reformers, President Xi, President Putin and Prime Minister Modi see themselves as restorers of their country’s proper place in the world.

As their economies grew stronger, the necessity for real change became even less paramount. The political threat, especially for China and Russia, was exemplified by Western orchestration of and support for regime change, such as the Arab spring and colour revolutions. It encouraged disengagement and reversion to centralised control.

In 1910, in The Great Illusion, Normal Angell famously argued that war was impossible because of economic interconnections. World War 1 undid those illusions. Today, the Ukraine conflict and related stressors are, in a similar way, challenging established geo-political and economic arrangements.

*  *  *

Satyajit Das is a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives  (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022). 

By Peter Tchir of Academy Securities

With today’s big drop in the GDP Price Index (from 9% to 4.1% vs expectations of 5.3%), it seemed like a good day to do an inflation dumpster dive.

The Fed and so many others are apparently convinced that inflation remains a problem and the Fed is going to have to tighten at least into February. Some argue for even longer. Is that inflation risk real? Or is it as wrong as when so many people were screaming “transitory!” at the top of their lungs last year?

This report will work on two main premises:

• Let’s look for the most up to date and potentially leading indicators of where inflation is headed, rather than looking backward.
• The Fed, all else being equal, would still like to engineer a soft landing.
• Starting conditions are crucially important to the path that inflation will follow.

Maybe this analysis will resurrect the policies of Volcker, but I suspect not.

Ignoring Foreign Inflation Data

I am not going to spend more than about 30 seconds thinking about inflation in Europe, the UK, or Japan.

The Yen has depreciated over 25% versus the dollar this year and the British Pound and Euro have declined more than 10%. Given how much these countries need to import, especially on the commodity front, it would be shocking if they weren’t experiencing inflation.

Much of the inflation in other parts of the world is linked to their currency weakness. Either they can in theory hike more (to catch up to us) or we could ease the pressure.

As mentioned in this weekend’s VUCA piece, FX is becoming a geopolitical issue. It is an issue that some of our allies are likely asking for relief from (in return for supporting some of our policies across the globe). So far Treasury Secretary Yellen has refused to acknowledge any concerns from other countries, but that could change.

Yes, foreign inflation is bad, but it tells us very little about U.S. inflation.

Commodity Inflation

I don’t think that commodity inflation is the key here, but it is so easy to address that we might as well get this out of the way.

I chose oil and gasoline because they attract so many headlines. I chose copper because who doesn’t like Dr. Copper as both an inflation metric and a gauge of economic activity.

I did use the 3rd contract rather than the front contract because I like the relative stability and it is less crazy in and around settlement dates. It tells the same story, just more nuanced. In any case, commodity prices are headed in the right direction (at least these three big commodities).

FX moves have certainly helped our inflation picture on the commodity front.

The fact that industrial commodities seem to be leading the way lower could be a sign that the economy is grinding to a halt behind the scenes faster than we realize (or just a function of China’s Zero-COVID policy). On the industrial side, commodities are “only” up 9.4% since the start of 2021 and are down 14% YTD. Not great, but the trend seems clear and probably reflects more than just dollar strength.

Housing

The most recent CPI data had the highest monthly increase in shelter costs since 1990! We discussed it in OER Seems Crazy and again in The Wall of Worry Knows No Bounds. I cannot harp on this subject enough – not only was shelter inflation high, but it was RECORD HIGH! We all know why it set a record (bad calculations, lags, estimates, etc.) but that doesn’t mean we should use an obviously useless number to determine policy! I’m told that the definition of insanity is doing the same thing and expecting different results (like ignoring housing inflation in the summer of 2021), but a simpler definition of insanity is using data that you know is patently false to drive models and determine policy.

Mortgage rates have skyrocketed! They have risen over 400 bps on the 30-year fixed and even a 5/1 arm offers little respite (having risen 274 bps). The U.S. is the one country that really promotes longer-dated mortgages (much to the chagrin of UK borrowers right now), so while it would seem risky to only lock in 5 years, the cost difference is very large.

I would be remiss not to point out that mortgage rates started rising the minute QT was discussed. QE likely impacted the mortgage market more than any other market (the Fed was a disproportionately large and yield indiscriminate buyer). These much higher mortgage rates are the price we now have to pay for all those purchases that drove us to non-market levels.

For every $100,000 of borrowing, interest on a 30-year has gone from about $3,250 annually to $7,300 for a new loan. Existing owners with longer-dated mortgages are protected, but that doesn’t help a new homebuyer. I cannot think of a faster way to stop upward mobility than having mortgage rates skyrocket (and I suspect that lending standards have also tightened, which is a double whammy).

So, how do higher mortgage rates translate into the housing and rental markets?

• For most Americans, the “balance sheet” item that has done the best this year is their mortgage. The change in mortgage rates is literally impacting how people are thinking about their house and where to live. How do you move to a similarly priced house in another part of the country if you have to pay 400 bps more on any mortgage? Will this cause people to rent their homes out?

Since 1998, as far back as this time series goes, we have never seen anything like this in terms of not just the total size of the move, but how fast that move occurred. I’m assuming that there is an entire cottage industry of lawyers and accountants figuring out ways to “sell your house” while retaining the mortgage, but in any case, this move is unprecedented and we have to think about how buyers, sellers, renters, and landlords will adapt to this.

We see home prices starting to tick down, but how useful is this data? If sellers don’t want to sell, is this reflecting much of anything? My understanding is that the Case-Shiller data has embedded lag effects, so it may not be reflective if prices are moving rapidly.

We see home sales across the board dropping from the start of the year. In August (there is a lag), new home sales actually had an uptick. At first, that seems strange, but 1) builders are in the business of selling homes and clearing inventory, so they might have more price flexibility and 2) there is no existing mortgage, so that element is weird. Probably a touch early on this trade considering the increase in builder announced cancellations (remember our “wait list” economy thesis?), but then again, maybe this level of bad news is already priced in?

It almost seems weird to think about, but with the cost of construction presumably dropping (the aforementioned commodity prices, for example) and mortgages making existing homeowners reluctant to sell, it might be an interesting time to revisit homebuilders for a long-term perspective (XHB, the ETF, is down 34% YTD and 27% for the year).

Which series seems believable? Which one looks like something we lived through, and which one seems just plain wrong? It is highly unlikely that monthly rents actually jumped by the most in over 30 years in September (it is more likely that they declined in September relative to August).

Autos and Other Big-Ticket Items

The cost to borrow money has gone up across the board. Autos are particularly interesting to me and I will harp on the importance of “starting” conditions. We have had two public companies comment on the used car market: CarMax (KMX) a few weeks ago and AutoNation (AN) today. One message that is clear is that the shortage of supply across all used auto segments is a thing of the past (certain segments are holding their own, but it is not a universal free for all anymore).

That is supported by the Manheim Used Auto Index, which is down 10% YOY based on mid-October estimates and while it is up 21% from late 2020, it is trending down rapidly.

Starting conditions matter:

• Work from home meant more driving for many people. Certainly, in major city centers, public transportation use fell as people drove themselves. COVID and WFH created a spur in demand for cars!
• With fewer things to spend money on (COVID shortages), stimulus checks, day trading, crypto, stock options, etc. and with cheap financing readily available, more people could afford “more” car.
• Supply chain issues were very real in the new auto space, forcing people to pay up for used cars when the alternative was an uncertain delivery date for a new car.

None of those conditions exist today!

I will grant that the new auto space isn’t back to where it was, but lots are no longer empty. Advertising (at least in my streams) has picked up for auto sales. I’ve even seen some messages offering discounts!

Autos, were also one of the biggest examples of the “wait list” economy that I could think of – see Baby Needs New Shoes.

Whether it was existing EV companies, new EV companies, bringing back old brands, etc., there was a surge in wait list activity. People were signing up for wait lists and the more expensive the car, the better (maybe a bit of hyperbole there, but not much).

My contention is that since it cost nothing to be on most wait lists, and in some cases you could sell your spot in line, they massively overstated demand. Certainly, with crypto prices lower, stock options (for many) being far less valuable, and the general wealth effect issues, we could see people dropping off wait lists or not taking delivery when cars are available. If you look closely at some deliveries versus production reports, I think you can see this occurring.

Auto companies are ramping up production for new cars as the supply chains are healing. However, as demand is waning (and likely satisfied by used cars) and the ability to pay is dropping fast, they may face an uphill battle.

In any case, the auto market is not going to be a source of inflation for months to come.

More broadly, as housing prices decline (at least if you had to sell) and rates rise, it seems logical that many other capital expenditures would suffer (today’s Capital Goods report was negative for September and August was revised down).

According to ISM data, inventories continue to build and new orders are actually declining. It takes time to dial back production, but that seems to be the likely outcome as not only have we caught up (post the supply shortages), but we are also creating a large inventory overhang.

There seems to be a significant amount of above trend inventory. Yes, this includes both large and small products, but it seems logical that when we have below trend inventory we can see inflation, and that when we have above trend inventory, there is some deflationary pressures (hence all the sales).

Let’s not forget that the cost of holding inventory is no longer trivial as SOFR has risen from 0.04% to 3.02% and credit spreads have widened as well – further incentivizing companies to cut costs to reduce inventories if buyers don’t appear.

Goods inflation seems to be behind us as well.

Jobs

Jobs and wages are the weakest part of my argument – maybe.

I have to admit, I was shocked when I pulled up this chart. I forgot about the wage spikes when COVID first hit. I believe that it had more to do with lower income people getting let go in droves as opposed to actual wage increases. However, the five years before COVID doesn’t look very different from the recent data, at least not to the naked eye. I thought I’d have a lot more explaining to do on wages.

How I see the job market playing out:

It was so difficult to hire workers that companies won’t fire workers (at least not right away). Companies will try and cut the outside services they use first.

Could this be what we are seeing in some of the big tech earnings? Will we see it in accounting, consulting, and legal firms? Anecdotal evidence is yes, but not seeing a consistent story here, yet.

Cuts seem to be focused on underperformers who are viewed as expendable. Tolerable, but potentially it is only the first wave. The next wave, if it occurs, will start cutting into the actual meat of the organizations.

Data between the Establishment and Household surveys has been inconsistent, and ADP hasn’t been much of a guide as they were switching their methodologies. We could see some serious revisions to old data (that was originally very strong) in the coming months .

As belts tighten, raises will be focused on critical spots where companies can generate revenues with those extra costs. Far less overall wage pressure. • So far, nothing seems to move the labor force participation rate, but as savings decline, the wealth effect erodes, and moratoriums expire, will we see some increase in the supply of labor?

Labor, while not a strong part of the inflation story, isn’t as weak as I’ve been led to believe.

Starting Conditions Matter

I won’t belabor the point, as you can read Dredging Up Pendulums to get the details (I do think that it is a very worthwhile read). What this highlights is that a simple pendulum is easily modelled and starting conditions (that are similar) produce very similar results. In a more complex system, like a double pendulum, you can no longer predict the results with the naked eye.

Both the single pendulum system and double pendulum system can be modelled exactly, but:

• Much more precise measurements are required for the double system (think about how flawed many of our measurements are in the economics world).
• More complex algorithms and more computing power is needed for the double pendulum. It is possible to do but doesn’t lend itself to one-sentence soundbites.

There are so many conditions that are “unique” to the current environment that I think it is extremely dangerous to try and “solve” for inflation with rather basic tools without accounting for the differences in how inflation was created this time around.

Bottom Line

Rates should perform well here as the inflation reality sinks in.

The longer the Fed sticks to hiking based on old data and not allowing the effects of earlier hikes to kick in, the more risk we get of a hard landing.

I’m in the camp that the recession will be sooner and deeper than expected, but we can still get one more “everything rally” before that gets priced in. I’m increasingly worried that earnings calls are pushing the average economic outlook towards my rather bleak call.

With the bulk of the FAAMG stocks – which is now GAMMA following Facebook’s rebranding to Meta (at least until the company  quietly changes its name back now that the whole Metaverse farce has blown up in its Metaface) – having reported Q3 results (which have uniformly been a disaster, sending megatech stocks tumbling), investors were keenly looking to Amazon and Apple earnings after the close today, to round out the picture for the (former?) market generals and set the tone for the rest of 2022, or at least until after the midterms when the BLS reports that real payrolls were actually -1,000,000, and also to conclude whether the ongoing Nasdaq implosion has been justified.

Focusing on Amazon, investors are expecting Amazon to outperform digital advertising peers Facebook and Google through an ad slump. The theory, as Bloomberg notes, is Amazon is closer to the customer at the time they are prepared to buy something, so that advertising is more valuable when consumers are penny-pinching when compared to broader marketing campaigns aimed at awareness on social-media sites like Instagram or Google’s search engine where users aren’t necessarily shopping.

Investors also expect a slight slowdown in Amazon Web Services sales growth (thank you Microsoft and Google), with third-quarter revenues expected to come in at $21 billion, up 30% from a year earlier. Cloud-industry peer Microsoft reported earlier this week that rising energy prices cut into cloud computing profits, so there will likely be some focus on Amazon’s cloud profit margins as well to see if they are under similar pressure. Investors expect operating income of $6.1 billion in the third quarter from Amazon’s cloud business.

Poonam Goyal, senior retail industry analyst for Bloomberg Intelligence, and Anurag Rana, BI’s senior software analyst, point to Microsoft’s projection of a slowdown as a harbinger for AWS. “Amazon Web Services’ sales growth in constant currency could dip in 4Q to about 26%-27% from consensus of 29%,” they wrote in a recent note. “The slump is probably going to stretch through 2023, with recovery possible in 2024.”

Amazon’s employee count will also be an interesting metric to watch. The company has been busy cutting some experimental projects, which would reduce its numbers, but it also announced plans to hire 150,000 people for the holidays, which is the same as last year. As of June 30, Amazon had 1.52 million employees globally. If that figure goes down, it will be the first time Amazon has reduced its number of employees for two consecutive quarters since 2001 and gives a clearer picture of how deep the cuts have been.

But while Q3 earnings will matter, all eyes will likely be on the forecast for the busy holiday quarter. Investors expect earnings of 39 cents per share on sales of $156 billion. Investors are counting on Amazon to boost profits and sales while trimming costs through hiring freezes and cutting experimental projects.

That said, like the rest of the tech sector, rising labor and energy costs coupled with slower spending growth have put a strain on Amazon’s business model. Amazon CEO Andy Jassy has taken several steps this year to boost revenues, including increasing the price of Prime membership and tacking new fees on merchants selling goods on the web store. Investors want to see if Amazon can maintain that strong connection with Prime subscribers and win their spending during the holidays, or if more expensive Prime membership compels them to shop elsewhere.

Heading into earning, Amazon shares suffered steep declines, falling as much as 5.1%. The e-commerce giant’s shares are down 8.5% over the past two days, the worst two-day slump since June.

So with all that in mind moments ago AMZN just reported Q3 results which were an absolute disaster and nailed the coffin of the FAAMGs shut, because not only did Amzn miss sales, and report disappointing AQS metrics but its forecast was a disaster.

• EPS 28c, beating estimates 22c
• With all that in mind, moments ago AMZN just reported Q3 results and they were an absolute disaster.
• Net sales $127.10 billion, +15% y/y, missing estimate $127.64 billion
  • Physical Stores net sales $4.69 billion, +10% y/y, beating estimate $4.68 billion
  • Online stores net sales $53.49 billion, +7.1% y/y, missing estimates $54 billion
  • Third-Party Seller Services net sales $28.67 billion, +18% y/y, beating estimates $28.49 billion
  • Subscription Services net sales $8.90 billion, +9.3% y/y, missing estimate $9.18 billion
  • AWS net sales $20.5 billion, +27% y/y, missing estimate $21.0 billion
  • North America net sales $78.84 billion, +20% y/y, beating estimate $76.95 billion
  • International net sales $27.72 billion, -4.9% y/y, missing estimate $29.28 billion
• Third-party seller services net sales excluding F/X +23% vs. +18% y/y, beating estimate +18.7%
• Subscription services net sales excluding F/X +14% vs. +23% y/y, estimate +20% (2 estimates)
• Amazon Web Services net sales excluding F/X +27% vs. +39% y/y, estimate +31.9%
• Operating income $2.53 billion, -48% y/y, missing estimate $3.11 billion
• Operating margin 2% vs. 4.4% y/y, missing estimate 2.48%
• Intl oper margin -8.9% vs. -3.1% y/y, missing estimate -7.71%
• Fulfillment expense $20.58 billion, +11% y/y, below the estimate $21.58 billion

But while revenue was disappointing and AWS was subpar at best, the reason why AMZN stock is imploding after hours is because the company’s guidance was absolutely catastrophic

• Sees net sales $140.0 billion to $148.0 billion, the midline coming far below the median estimate of $155.52 billion
• Sees operating income to be between $0 and $4 billion, also missing the median estimate of $4.66BN

In short: ugly earnings, catastrophic guidance!

Digging into the numbers we find that operating margins tumbled to 2.0%, down from 4.0% and missing the estimate of 2.5%. In fact as shown below, the only reason this number wasn’t positive is thanks to AWS.

And while the market was not happy with the overall profit margin, it was even less enthused with the profit margin breakdown where despite a modest improvement in AWS, the international operating margin collapsed to the lowest in the past decade, with US online sales still unable to turn green. In fact, if it wasn’t for AWS, AMZN would have negative operating income.

The chart above shows that Amazon’s online retail business in North America and international both lost money. This is after hiking the cost of Amazon Prime $20 a year and adding fees to online merchants that sell on the platform. If Amazon Web Services is subsidizing the e-commerce side, it makes it harder to justify keeping the businesses together.

And while AWS did post a modest improvement in profit margins, where it did disappoint was in revenue growth, which rose 27% Y/Y to $20.54 billion, missing the estimate of $21.01 billion.

But all these disappointing data points aside, what markets are mostly focused on is that forecast revenue growth in a range of $140-$148BN (midline at $144BN) suggests that very soon the company may see an unheard of event: shrinking revenues!

As Bloomberg puts it, the results will ramp up pressure for CEO Andy Jassy – and all the other tech giants – to further cut costs. Amazon has a hiring freeze in its retail team and has been cutting experimental projects. But investors will be hungry for deeper cuts if sales are falling flat.

And speaking of Bloomberg, BBG Intel’s Poonam Goyal was rather adamant “It’s actually pretty bad across the board. It’s hard to find something good in this press release….It’s kind of humming the same tune of results we saw earlier. The consumer is slowing.”

In light of these catastrophic earnings and terrible guidance, it is not surprising that the kneejerk reaction may have been the worst in post-earnings plunge Amazon history: the stock was down as much as 21% after hours, plunging to the lowest level since the March 2020 covid crash when the entire economy was locked down!

Not surprisingly, Wayfair and EBay shares are falling postmarket after Amazon’s forecast miss. Wayfair is down as much as 6.2% while EBay declines as much as 3.6%. Alibaba is down 1.7%.

The ECB hiked rates by 75bps as expected but the somewhat dovish language sent Bund yields (-25bps) and EUR lower on the day. 10Y Bund yields tumbled back below 2.00%…

Source: Bloomberg

EUR back below parity against the dollar…

Source: Bloomberg

US stocks gained some ground on the ECB but tumbled on the US cash open, then ripped back after another Democrat demanded Powell stop hiking rates (but not for political reasons of course).

That rally last about 45 minutes, and then… (amid Putin’s address), the nuke threats started from Washington:

• *AUSTIN DESCRIBES RUSSIA AS ‘ACUTE’ THREAT TO US VALUES, WON’T RULE OUT NUCLEAR USE AGAINST NON-NUCLEAR THREATS,  DEFENSE STRATEGY SHUNS LIMITS ON USE ONCE EMBRACED BY BIDEN

And stocks sank. Nasdaq was monkeyhammered 2% lower and along with the S&P closed red. The Dow was the only major to manage gains, helped by CAT (which added over 100pts alone)…

Shorts were squeezed again at the open, but – again – that didn’t last…

Source: Bloomberg

But call demand continues to dominate put demand as there is no fear…

Source: Bloomberg

Notably, VIX was flat to down today despite the S&P being down… once again as we suspect puts were covered (pressuring vol lower)…

Source: Bloomberg

META was clubbed like a baby seal (-24% – its second worst day ever), tumbling to 6 year lows, down 75% from the highs (with Zuck down over $100bn in net worth since the highs!!)…

Source: Bloomberg

The market cap of the FANG stocks is back below pre-COVID highs…

Source: Bloomberg

Just for some context, the impact of GOOGL, MSFT, and META (among others) has prompted the biggest 2 day outperformance of the equal-weighted Nasdaq over the cap-weighted Nasdaq since Nov 2012…

Source: Bloomberg

As month-end spookily looms on Monday, the spread in US Majors is massive (Nasdaq +2% but The Dow +12% MTD)…

Source: Bloomberg

Most notably today we saw rate-trajectory expectations dovishly dive (GDP Price indices fell a little?) with terminal rate dropping and rate-cut hopes rising.Note that the Fed terminal rate (in May 2023) is down from 5.03% last Friday to 4.78% at its lows today…

Source: Bloomberg

That helped send UST yields dramatically lower with 5Y outperforming (-8bps) and 30Y the relative weakest. However, from the day’s highs, the swing in yields was huge 15-20bps across the curve. The main buying pressure in TSYs was from the GDP data to the European close…

Source: Bloomberg

10Y Yields dropped back below 4.00%…

Source: Bloomberg

The BoJ is set to announce tonight… will they comment on the fact that their YCC has broken?

Source: Bloomberg

The dollar rebounded modestly after 2 ugly days…

Source: Bloomberg

Bitcoin drifted lower today after 2 days higher…

Source: Bloomberg

Gold also drifted lower today

With the easing of rate expectations, and despite the ugly durable goods data (perhaps offset by US GDP), oil prices rallied today with WTI back abive $89.50…

US NatGas, on the other hand, was smashed lower (back below $6)…

Finally, is it over yet?

Source: Bloomberg

Maybe… but Nasdaq never made it back to those levels for years.

Authored by Steve Watson via Summit News,

Hundreds of woke Twitter employees have deserted the company and gone to work for Google and Meta over the past few months in anticipation of Elon Musk taking over the company, according to a Business Insider report.

The piece notes that in the past three months, a total of 530 Twitter employees have left, with many running directly to the tech giant’s direct competitors.

Over 1,100 employees have left Twitter since Musk announced his intention to buy the company back in January, with almost a third going to Google or Meta.

The figures come from a new analysis of LinkedIn data, with the report noting that other workers have moved to the likes of Pinterest, LinkedIn, Snap, and TikTok.

Musk, who has vowed to complete the Twitter acquisition by Friday, has said he intends to make huge staff cuts of up to 75% anyway, cutting worker numbers from around 7,500 to around 2,000 employees.

The Washington Post also notes that even if Musk doesn’t close the deal, Twitter officials have planned a $800 million cut in payroll by the end of 2023 regardless.

Musk previously mocked work-from-home enthusiasts at Apple with a lazy dog meme, and also stated that constantly working remotely is “phoning it in,” informing employees they can collect their belongings if they disagree.

pic.twitter.com/qup2NUiOM1

— Elon Musk (@elonmusk) May 18, 2022

In an email to Tesla employees earlier this year, Musk wrote “Remote work is no longer acceptable,” except in extreme cases.

“Anyone who wishes to do remote work must be in the office for a minimum (and I mean *minimum*) of 40 hours per week or depart Tesla,” he wrote in correspondence then leaked by Tesla shareholder Sam Nissim.

#Tesla no longer allowing remote work@TeslaPodcast @SawyerMerritt @WholeMarsBlog @garyblack00 @GerberKawasaki pic.twitter.com/DKAgh9ptSX

— Sam Nissim (@SamNissim) June 1, 2022

Musk confirmed that the email was authentic and doubled down, saying anyone unhappy with it should “pretend to work somewhere else”:

hey elon a lot of people are talking about this leaked email, any additional comment to people who think coming into work is an antiquated concept? https://t.co/E3qSBVrJIJ

— Whole Mars Catalog (@WholeMarsBlog) June 1, 2022

Musk has promised that “work ethic expectations” at Twitter will be “extreme” when he takes over:

Also, work ethic expectations would be extreme, but much less than I demand of myself

— Elon Musk (@elonmusk) May 7, 2022

Yesterday, Musk was filmed entering Twitter HQ literally carrying a sink. He tweeted the footage with the caption “let that sink in,” clearly an effort to trigger his detractors:

Entering Twitter HQ – let that sink in! pic.twitter.com/D68z4K2wq7

— Elon Musk (@elonmusk) October 26, 2022

The post prompted a barrage of memes imagining the reaction of remaining woke Twitter employees:

Meanwhile, as Twitter stock is rising, Meta is collapsing:

Update(1534ET): Putin in his nearly four-hour long annual Valdai Discussion Club speech (which included a the lengthy Q&A portion) “appeared relaxed”, Reuters observed while at times questioned by journalists and panelists about the prospect of nuclear war. 

Importantly, he rejected head-on the allegations from the West that he ever so much as hinted at plans to deploy nukes in Ukraine, describing a nuclear strike in the context of the “special operation” to be ultimately pointless. “We see no need for that,” Putin said. “There is no point in that, neither political, nor military.” He underscored, “it doesn’t make sense for us to do it.

He went on to emphasize that Russia had “never said anything proactively about the possible use of nuclear weapons by Russia.” At the same time he lashed out at Washington, for being the “only country in the world that has used nuclear weapons against a non-nuclear state” – in reference to WWII and the bombs over Hiroshima and Nagasaki.

He specifically referenced prior statements of Liz Truss and vague references to his saying he’s willing to defend Russia “by all means available” as having been intentionally misinterpreted and distorted: 

Putin said an earlier warning of his readiness to use “all means available to protect Russia” didn’t amount to nuclear saber-rattling but was merely a response to Western statements about their possible use of nuclear weapons.

He particularly mentioned Liz Truss saying in August that she would be ready to use nuclear weapons if she became Britain’s prime minister, a remark which he said worried the Kremlin.

“What were we supposed to think?” Putin said. “We saw that as a coordinated position, an attempt to blackmail us.”

Literally as Putin was speaking, the Pentagon decided it was a good time to unveil a stunning nuclear strategy reversal, saying it would no longer rule out use of nuclear weapons against a non-nuclear threat.

As we detailed earlier, the Defense Department said in the long-awaited document issued Thursday that “By the 2030s the United States will, for the first time in its history face two major nuclear powers as strategic competitors and potential adversaries”. In response, the US will “maintain a very high bar for nuclear employment” without ruling out using the weapons in retaliation to a non-nuclear strategic threat to the homeland, US forces abroad or allies.

In the document, which was framed well before the invasion, the Pentagon says Russia continues to “brandish its nuclear weapons in support of its revisionist security policy” while its modern arsenal is expected to grow further. 

Of course, Putin is now essentially pointing the finger at Washington and its allies for being the real nuclear threat in the world. The DoD briefing certainly didn’t hurt his case, at least from the point of view of Moscow and its allies. 

* * *

“Russia is not challenging the western elite. We are not trying to become the hegemon,” Russian President Vladimir Putin said early in an important speech before the Valdai Discussion Club meeting outside Moscow on Thursday. Each year the Valdai speech is a major one and closely watched by Western officials and media.

This year it was touted with the eye-catching title of “A Post-Hegemonic World: Justice and Security for Everyone.” And of course, this year’s Valdai meeting comes against the backdrop of the biggest war Europe has seen on its eastern doorstep since WWII. 

Putin said in his remarks that Russia merely wants to “defend its right to exist” and “won’t let itself be destroyed and wiped off the geopolitical map.” This as nuclear rhetoric and threats of defending red lines between Moscow and the West have reached heights not seen since the Cold War. 

He repeated a familiar refrain of a crisis unfolding because the Western allies are using Ukraine for their “dirty game” in an ultimate drive for world domination. “Power over the world is what the West has put at stake in the game it plays. This game is certainly dangerous, bloody and I would call it dirty,” he said according to a state media translation. 

“But in the modern world, sitting aside is hardly an option. He who sows the wind will reap the whirlwind, as the proverb says,” he added. Repeating a well-known theme of his, juxtapositioning collapsing unipolar order vs. multipolarity, he said “new centers of power in the multipolar world and the West will have to start talking as equals about our common future.”

“[This game] denies the sovereignty of nations and peoples, their identity and uniqueness, and has no regard whatsoever for other countries,” Putin added.

Commenting on one segment of the talk, The New York Times said the Valdai speech sought to appeal to conservatives in Europe and the US: 

Mr. Putin insisted that Russia did not fundamentally see itself as an “enemy of the West.” Rather, he said — as he has before — that it was “Western elites” that he was fighting, ones who were trying to impose their “pretty strange” values on everyone else.

“There are at least two Wests,” Mr. Putin said in his speech at the plenary session in Moscow of an annual foreign policy conference. One, he said, was the West of “traditional, mainly Christian values,” which Russia was close to.

But Putin drove home in contrast that “There’s another West — aggressive, cosmopolitan, neocolonial, acting as the weapon of the neoliberal elite.”

Ukrainian officials have been watching the speech closely, and commenting: 

“Confidence in one’s infallibility is a very dangerous state, one step away from destroying those they don’t like” – Putin knows what he is talking about at Valdai. pic.twitter.com/0VRSjKlWiu

— Maria Avdeeva (@maria_avdv) October 27, 2022

And more specifically on the Ukraine conflict, the Russian leader charged of the West’s actions, “They’re always trying to escalate…They’re fueling the war in Ukraine, organizing provocations around Taiwan, destabilizing the world food and energy markets.” 

And more via state media translation:

Putin warned that the West’s confidence in its “infallibility” is a “very dangerous” condition, with there only being “one step” between this self-confidence to the idea that “they can simply destroy those they do not like, or as they say, to ‘cancel’ them.”

Emphasizing that Russia is not a natural “enemy” of the West, Putin urged Western political elites to stop seeing “the hand of the Kremlin” behind all their internal problems.

On multipolarity, Putin’s message to Europe is essentially “take it or leave it”…

Putin is at it again. New Munich III speech at Valdai conference. He is laying the foundations of new multipolar world order. The message to Europe is “take it or leave it”. pic.twitter.com/oUixDO7Jmm

— србин (@forzaserbia) October 27, 2022

Western officials are also keeping a close watch on Putin’s words regarding nuclear doctrine and usage. Putin at Valdai underscored he sees “no political or military reason” to conduct a nuke strike in Ukraine. He also stressed Moscow’s nuclear doctrine is defensive in nature. “Russia has never talked about nuclear use, only replied,” he said. 

He went on to warn that it remains Russia will never “put up with what the West tells it to do” – and that while Russia should not be seen as a direct challenge to the West, it reserves the right to develop. With this theme established, Putin asserted that Washington has discredited international finance “by using the dollar as a weapon” – thus he posited that in the future continued moves toward “settlements in national currencies will dominate.”

Authored by Simon White, Bloomberg macro strategist,

The real decline in stocks has yet to come, as inflation and recession threaten the historic overweight in equities versus bonds.

It has been a torrid year for financial assets. The paradigm shift in inflation has led to decades of market experience being turned on its head, with stocks and bonds commonly falling together. This year has seen a peak-to-trough drawdown of over 25% in the S&P, and an historic 15% drop in Treasuries.

The stock-bond ratio has declined precipitously, but we are likely just getting started.

The ratio tends to revert to its mean, but with big overshoots.

Those to the upside typically lead to overshoots to the downside of a similar magnitude. The enormous fiscal and monetary injections during the pandemic led to a dizzying bubble in financial assets, sending the stock-bond ratio skyward.

But the fall in stocks and bonds this year has only taken the ratio to just below its mean.

We are in the process of an overshoot that could take it much lower still, driven by the twin specters of inflation and recession.

It’s a common misconception that equities are an inflation hedge. Some stocks and sectors, particularly those related to real assets, do make good inflation hedges, but equities overall are terrible at protecting against persistent price rises.

In fact, equities were the worst-performing main asset class in both real and nominal terms during the Great Inflation of the 1970s. This is because they became a shunned asset.

Why?

Stocks have an infinite duration with a fixed coupon, the return on equity. Bonds, on the other hand, have a maturity date where there is an opportunity to renegotiate the coupon.

When inflation is high, equities have to compete with bonds and they begin to look less and less attractive. Today, the real dividend yield of the S&P is -5.6% and the real earnings yield is -7.2%, while the real 10-year yield on a Treasury bond is -3.5%. Why bother with equities when you can get a comparatively juicy, less risky return from bonds?

The big overweight in stocks versus bonds is therefore at great risk. The prospect of higher returns has meant a strong preference for stocks over bonds is the norm in the US. That overweight currently sits at its highest level since the tech bubble of 2000, after hitting even greater extremes during the pandemic.

As it becomes apparent inflation is entrenched and not returning to a low-and-stable regime any time soon, the penny will drop that equities are more of a leaky ship than a water-tight revenue generator, prompting an exodus to comparatively inflation-resilient bonds.

This exodus could be sizable, taking the stock-bond ratio considerably lower and decimating the long-term real return of equities. The 1970s saw a similar rebalancing, with the equity overweight in the late 1960s morphing into a record underweight that persisted until the late 1980s. Inflation, like a skin disease, gave equities a rash that made them unattractive for many years. They face the same risk today.

A recession only makes the risk of further stock underperformance more immediate. Leading indicators point to a US recession in the next 3-6 months as being all but inevitable. Stocks face more downside in a downturn, while bonds are likely to catch their usual haven bid. History shows that the stock-bond ratio falls at a median of over 12% in the six months after a recession begins. Leaving aside that in real terms both assets are still likely to lose you money, the stock-bond ratio is poised to fall further in any economic slump.

Ultimately, though, stocks are more at risk than bonds as governments do not borrow in equity markets.

High inflation means yields could rise much higher, and at this point equities would be sacrificed to limit how much governments have to pay to borrow by way of financial repression. This, later on, may mark the final capitulation in the stock-bond ratio.

The long-term outlook for bonds is less than rosy in the current inflation paradigm, but the prospect for stocks is dimmer still.